Key Points

  • The potential for a delayed, but not derailed, manufacturing recovery in the coming quarters could fuel a rebound in commodity demand and relative outperformance by emerging market stocks.

  • Copper and oil seem to be pricing in a substantial hit to world GDP, which seems unlikely given that most of China’s workers have returned and official data shows that the spread of the virus may now be contained.

  • If growth turns out to be less negatively impacted than feared, commodities and emerging market stocks may be poised to rebound.

As a recovery in global manufacturing began to take hold in the fourth quarter of last year, commodity prices rose dramatically. Yet, emerging market (EM) stocks failed to see the similarly strong outperformance of U.S. stocks that typically accompanies rising commodity prices. EM stocks and commodities both demonstrate heightened sensitivity to the pace of global economic growth. EM stocks also have greater exposure to commodity producers.

A large gap developed in the fourth quarter between the trend in commodity prices and the relative performance of EM stocks. That gap closed rapidly in early 2020 as the emergence of the novel coronavirus in China was feared to wipe out manufacturing demand for materials and travel demand for oil, as you can see in the chart below. The potential for a delayed, but not derailed, manufacturing recovery in the coming quarters could fuel a rebound in commodity demand and the relative outperformance by EM stocks.

Readying for a rebound?


Source: Charles Schwab, Factset data as of 2/13/2020

The markets are split on the economic impact of the coronavirus. In general, stock markets around the world have posted gains this year. In contrast, global commodity prices have plunged and remain near lows.

  • Copper fell about 13% from the start of the year. The metal’s widespread use in everything from homes to computers makes it very sensitive to the pace of growth in the global economy, and earned it the nickname “Dr. Copper.” This recent fall in copper prices set a record, sliding for 13 days in a row, to below last summer’s bottom, when U.S. trade tensions with China were escalating.
  • The global benchmark for oil, Brent crude, has fallen more than 20%, plunging from $69 per barrel in early January to $54. The U.S. benchmark, West Texas Intermediate, fell below $50 per barrel. The virus outbreak threatens to curb global crude demand growth by as much as 400,000 barrels a day, according to an analysis by OPEC. At these prices, we might expect supply cuts from both OPEC and U.S. shale producers.

Commodities pricing in further downside to world GDP growth


Source: Charles Schwab, Factset data as of 2/14/2020.